Editor’s note: Washington State Treasurer Mike Pellicciotti stopped by The Daily World offices in Aberdeen during a visit to Grays Harbor County last week and sat down for a lengthy editorial board interview and discussed a variety of topics. In Part III of an exclusive Q&A today, Pellicciotti discusses investments, pensions and how his office affects the lives of Washingtonians. This article has been edited for brevity.
The Daily World: What does the credit rating for a state or country entail?
Mike Pellicciotti: Let me give you a couple examples. A week and a half ago, I was in Winlock where we had financed a fire truck. The Legislature determines the individual projects, but one of the programs we have in the treasurer’s office is the “local” program. The local program is a program that I’m really proud of. We take local projects, maybe a fire district in Winlock that needs a new fire truck or a new ambulance, five school buses in Pacific County, maybe a county building. If the local government, especially in rural areas, financed it themselves, they would have to go through a bank at a much higher interest rate. We pull these local projects together and use our state’s good credit and issue them in one big kind of bond package and then pass that savings on to the local governments because of our strong credit rating.
We as the state, use the full faith and credit of the state of Washington to do a school bond guarantee, which then means they essentially get our interest rate we would have if we were issuing the bond. It means if you’re a rural school district, you’re getting a much lower interest rate on your bond, which means more bang for the buck, more school building, and makes it much more palatable to the voters and saves money for voters.
A lot of the benefits of the credit rating are particularly pronounced in local areas, especially disproportionate rural areas because there are areas, these smaller fire districts and school districts or whatever, benefit that much more by our strong statewide credit rating. But then obviously from a state standpoint, all of our capital projects, all of our transportation projects are financed through bonds. When we finance and issue those bonds, the lower rate means, again, more bang for the buck because we’re paying a lower interest rate, which just means more savings direct to the people of the state of Washington.
One of the concerns I have going into this legislative session is there’s going to be a lot of pressure on the Legislature to balance their budget and there’s going to be pressure to not have any new additional cuts and not have any additional taxes at the same time that our economic growth is decreasing and revenue projections are decreasing. My concern is always that the Legislature is going to take door number three, which is to raid reserves or pensions in a way that could dramatically impact our credit rating and then lead to all of these negative consequences. U.S. News and World Report has just rated Washington state number one in the nation for the second year in a row for long-term fiscal stability. Not only do we have a Moody’s AAA credit rating, our credit ratings this year are stronger than the federal government’s for the first time in history.
We have financial strength, but it’s going to take all of that financial strength to weather what’s coming, and I hope that the Legislature takes responsible actions to ensure our continued financial strength, all of which leads to savings for local taxpayers and a lower cost of living for all Washingtonians.
TDW: It seems like Gov. Bob Ferguson gets that, he ticked off more than a few Democrats.
MP: He was dealt a rough hand, $16 billion in new spending and people have always said they want compromise. While folks on the left said we want nothing but new taxes for that to make up that $16 billion and folks on the right said we want nothing but cuts, related to that $16 billion. He met it in the middle and that pretty much pissed everyone off. That’s real leadership. That’s the challenge moving forward in this next budget cycle is you now have that much more angst from the left and the right before the Legislature even meets. At the same time as a large part due to tariffs, the economy’s weakening, revenue projections are decreasing. What is important to me is that we have honest conversations about that and that people inform their legislators on what they want. We need to get away from folks being in their echo chambers, where if you’re on the left, you’re hearing about the biggest tax, the biggest cuts to services in history and if you’re on the right, you’re hearing it’s the biggest tax increase in history.
It doesn’t mean both aren’t factually right, but it’s not telling the full story of what happened last legislative session, nor is it giving a real perspective on the challenges facing the next one.
TDW: How does your job as state treasurer affect everyday Washingtonians, the decisions you make or, you know, the work that you do with other government agencies and your staff? How do you affect the people of Washington on a daily basis?
MP: A big focus of our work is keeping the state operational despite the impacts of the federal government’s withholding of funds and making sure that ferry workers keep getting paid and state workers keep getting paid and that when the president of the United States withheld all dollars from the state of Washington on Jan. 28, we were prepared and people hardly, if at all, noticed that even happened. We’ve been very successful with that effort.
(In trying) to reduce costs to Washingtonians we’re making sure we maintain our financial strength so we can maintain our credit and make sure all those systems are in place so that there are lower tax burdens on folks, especially in local communities, because we’re able to provide assistance to local communities with the financing structures that we have. But ultimately, a lot of different boards and commissions that I’m on, I focus a lot on trying to just ultimately find cost savings in educational expenses. For example, one of the things I’m proud of is reducing the contribution participation cost for people in the GET program or 529 program. We can invest in educational programs because we manage investments well related to that. We’re able to reduce the cost of an education credit. That is real money for folks. A lot of proposals we’ve put forward related to say Washington Saves, which is a bill that we put forward and that I requested the Legislature and we passed into law provides a retirement option now to 1.2 million Washingtonians who previously had no retirement option. We’ve started implementing that this year. It’s going to go into effect in 2027. … It’s an automatic IRA, and I think we’ll have a big impact in creating opportunities for them over time.
And then obviously putting forward other policies that create economic empowerment for folks like financial education or baby bonds proposals are all things that I know are particularly impactful in rural communities and in providing that economic empowerment so that folks can navigate the world. This year I’m just laser focused on whatever else we can do to lower the cost for average Washingtonians.
TDW: What is your office’s role in investing?
MP: The $35 billion that I invest in our office are state and local funds. As it relates to those funds, those are generally more fixed income, conservative investments like bonds, things like that and the higher interest rate environment actually generally contributes to a higher return on those investments. But increased interest rates, means higher costs on our bond side. So no matter what is taking place, we’re always working hard to provide value regardless of the market condition. Before interest rates went up, we refinanced every bit of debt we could legally refinance in this state. We have now saved the people of the state of Washington by refunding those previously issued bonds, those refinancings, over $875 million in net value savings.
That’s what happens when you are smart about that when interest rates are low. When interest rates went up, we hugged that interest rate curve tightly. That means the investments we do on behalf of local governments are over 30 times what they were four years ago. Our office is generating an extra $3 million more a day to local governments … by hugging that interest rate curve tightly as we invested those bonds.
I was talking to the mayor of Kettle Falls, who was part of the Rotary that I spoke to last week and he was saying that impact on the increased investment returns has been noteworthy in (his) small city because they’re able to meet a lot of essential services they otherwise wouldn’t be able to accomplish.
Our focus is, regardless of these market conditions, to provide value, provide savings, and this is done through the talent of 70 very talented folks in the office of the state treasurer. Every one of these folks could be making two, three, four times as much in the private sector, doing the exact same work with the exact same skill set for the exact same hours. They do this work to generate this money to get back to the people. …
TDW: You have a lot on your plate. … How big of a percentage of what your office does revolves around investing?
MP: We have different groups in our office. In 2021, I was focused on raising the alarm that I thought inflation would not be transitory. You would see inflationary pressure for an extended period of time and that the Federal Reserve would have to respond to that inflationary pressure by increasing interest rates. To your point, interest rates affect all aspects of our office. It affects our debt management side of the house for our bond issuances, it affects our investment side of the house. We’re managing $21 billion worth of previously issued bonds. Last month, we refinanced new bonds that we couldn’t legally refinance before and saved over $100 million in doing so. At the same time, our investment returns are truly generating $3 million more a day than they were just four years ago. At the same time, that’s $35 billion of investments, $21 billion of managing previously issued bonds. We have a cash flow of about a quarter trillion dollars a year in cash flow in and out of the state treasury, checks, payments. We’re definitely one of the most efficient state agencies with only 70 people. It’s definitely one of the smallest, but very efficient with very talented folks.
This team works very hard to deliver for the people of the state of Washington. But at the same time, we also need to now respond to these threats from the federal government, these unprecedented threats, in order to keep all this operational. That’s what my office and I have been leading on since last August, both here in the state and nationally, so that we could be prepared for the “bananafication” of America. It’s what I’m continuing to push back on. At the end of the day, we can defend ourselves from the federal government, keep operational here as a state, and still move us forward by reducing the costs and economically empowering the people of the state of Washington through smart financial policies as well. We have a great team of folks who are making that happen. I’m really proud to be a part of it.
TDW: You say you’re level-headed. What wakes you up in the middle of the night? What really worries you?
MP: It’s one of the things I’m dealing with (now), one of the boards I’m on is the State Investment Board, which manages state pensions. I have been advocating for years now. I should start off by saying I can’t speak on behalf of the State Investment Board. I’m only one member of the State Investment Board. I’m not speaking on behalf of them today. But for years, as one of those 15 board members, I’ve been advocating to de-risk our pension portfolio and we are now nearly fully funded. That is a good thing. We’ve worked very hard at that in our office to get additional money toward some of the older underfunded pension plans making sure the Legislature fully makes its full actuarial contributions. We now have, depending on how you calculate it, either the number one or number three best funded pensions in the country. We’re nearly fully funded and maybe one of the only pensions in the country to be so well-funded. I believe that we need to be working to de-risk our pension portfolio. That means not be investing in the rate that they are in things like private equity, other illiquid assets, or at this point, even in the same proportion related to public equity. I think we should, given the success we’ve had related to our pension funds and making sure that our pensions are well-funded, that we should take the win, have more conservative investments, and de-risk that pension portfolio. The board is meeting as a part of a four-year review related to our pension allocations. I’m going to do all I can to advocate that it should be changing course related to those allocations. I’m not sure how that’s going to go. I can control things within the treasurer’s office. I can’t control things in a separate state agency.
TDW: Are pension funds invested into the stock market?
MP: So the pension funds are invested very broadly. If you’ll remember on your ballot, the first thing on your ballot this last legislative session was a constitutional amendment to allow for the Long-Term Care Act funds to be invested in things other than just conservative fixed income bonds. The reason for that constitutional restriction is because in 1889, our founders, many of whom are from (Grays Harbor), in 1889, were worried about what was happening on the East Coast, where a lot of states had invested heavily in railroad stocks. Because they said, “Hey, we’re going to invest in the railroad. It’s going to lead to infrastructure and we’re making an incredible amount of money. What could possibly go wrong?” Well, it went wrong. Our founders in 1889 said, “We’re going to put a restriction in our state Constitution to limit public investments to generally conservative fixed income investments.” Those are the restrictions that apply to me with all public funds or any county treasurer, whatever the case may be. So local governments, like the state, are limited constitutionally to certain investments. …
TDW: Let’s talk a little bit more about the “local” program, it seems like you’re an evangelist for it.
MP: I am.
TDW: It doesn’t seem like enough people either know about it or are taking advantage of this. How does Aberdeen or Elma or Ocean Shores take advantage or find out about this program?
MP: Honestly, what I would say is just contact our office and we’re happy to talk to them about it. We have information on our website. We’ve actually redone our website to make it easier for folks to access, you know, whoever’s contacting, whether you’re an individual who wants information on unclaimed property and how your government works, if you’re a business or if you’re an investor looking for information on our bonds and how we invest, or if you are a government. You can now have an entry point to be able to access all this information. But I recognize reality, especially for smaller governments where you often have a lot of turnover. City managers might come and go, whatever the case may be. Just because a city knew about an opportunity four years ago doesn’t mean the same folks that are there now know that it exists. That’s why my goal is to make it easier and reduce the costs for everyday Washingtonians. And one of the most effective ways to do that is to make it so that they can benefit from a state’s strong credit ratings and financial strength and can rely less on big banks and sending profits to Wall Street. The more we can lower costs for local governments, the more we’ll be able to get ultimately more money back into the pockets of local taxpayers.
We’re here to get the best financing of whatever the community feels that it needs and ultimately, maybe that means they get more utility … that’s serving a value based on whatever the legislators in that community, city council, otherwise think is appropriate. You get mobile jaws of life. You get one extra school bus. That’s what happens when you finance things at an appropriate rate.
